2nd LD Writethru-China Focus: Consumer inflation picks up, producer deflation stays stubborn

China's consumer inflation ticked slightly higher in June while at wholesale level, deflation remained a problem for a 40th month in a row, official data showed on Thursday.

China's consumer price index (CPI), a main gauge of inflation, edged up 1.4 percent in June, slightly above market forecasts of 1.3 percent and a 1.2-percent rise in May, according to the National Bureau of Statistics (NBS).

On a monthly basis, consumer prices in June remained unchanged, compared with a dip of 0.2 percent posted in May.

NBS statistician Yu Qiumei attributed the pick-up to a lower comparative base from June last year and higher prices of food, including vegetables and pork.

For the first half of the year, CPI edged up 1.3 percent year on year.

Minsheng Securities forecast that China's CPI growth will continue accelerate in the second half, to around 2 percent in the last quarter, but remain under the government's annual target of 3 percent set for the year.

The producer price index (PPI), a measure of costs for goods at the factory gate, fell 4.8 percent year on year in June, widening from the 4.6-percent drop seen a month earlier.

The reading also marked the 40th straight month of decline.

"This showed industrial demand is worsening, and China continues to face prominent deflationary risks," noted Qu Hongbin, chief China economist at HSBC.

Wen Bin, chief researcher with China Minsheng Bank, said the data pointed to continuously weak domestic demand in the economy, adding there is still room for the central bank to ease its monetary policy.

China's economy grew at its lowest rate in six years in the first quarter, expanding 7 percent, weighed down by a housing market downturn, weak domestic and external demand and overcapacity.

To bolster growth, the Chinese government has unveiled measures including four interest rate cuts since November, accelerated fiscal spending and industrial reforms.

However, analysts predict growth will slip further in the second quarter to below 7 percent as the impact of these pro-growth measures has yet to spread. Second-quarter GDP data is due on July 15.

Given the weak growth, Qu predicted an interest rate cut by 25 basis points and 100-basis-point reductions in banks' reserve requirement ratio in the third quarter.

Recent stock market volatility has cast a further shadow on the world's second-largest economy, with its key Shanghai index shedding nearly one third since a June peak.

A batch of supportive policies has been rolled out in the past week to revive investor confidence, including asking 21 major securities brokers to spend 128 billion yuan (about 21 billion U.S. dollars) on exchange traded funds that track the performance of blue chip stocks.

The benchmark Shanghai Composite Index opened 2.13 percent lower on Thursday, but turned positive to close the morning trading session by rising 1.3 percent. The market staged a strong rally minutes after the afternoon trade started.

As of 13:30, the benchmark Shanghai Composite Index surged nearly 5 percent while the Shenzhen Component Index gained 4 percent. Endi